The Education loan is a unique service in the sense that it is not bound by a structure of payment like other loan types such as home loan, car loan or personal loan. A student only usually starts paying it off once they have secured a job that can fund the repayment of the loan. For many students, an education loan is the next big step to laying the foundation for their careers. Often students take an education loan to go abroad and study, which gives them a wider horizon in the long run. Around 90 per cent of education loans are taken from public sector banks by value and volume according to a CRIF High Mark analysis. With the 10th marks released in August, graduates are going to be on the hunt for higher studies and that’s where an educational loan comes in.
Banks are not the only option for aspiring students. You could take the traditional route and choose a bank loan, but that there is also an option to borrow a loan from non-banking finance companies (NBFCs). Both have their own sets of advantages and drawbacks, depending on your financial situation and standpoint.
An important point divergence is the interest rates. Banks have a somewhat standardised interest rate that maintains some form of uniformity as an education loan was taken after April 2016 is linked to the bank’s marginal cost of funds based lending rate (MCLR). An NBFC does not carry this concept of MCLR, therefore they often set their own interest rates based on the market competition and the cost of operations amongst other factors. This can lead to an education loan from NBFCs being higher in interest.
In terms of repaying the loan, both the bank and the NBFC operate more or less the same. Most of the education loan lenders have a wide enough gap that students can finish the course and then start paying back the loan after they get placed. The core advantage of picking an NBFC educational loan over that of banks would be the flexibility to study a wider array of niche subjects. However, according to a CRIF High Mark analysis, the top lenders of an educational loan are the public sector banks by volume in annual disbursements over the past 4 to 5 years. It has also shown that private banks have a higher interest rate for an education loan as compared to public sector lenders.
With a bank, there is a select variety when it comes to getting an education loan. One could apply for an education loan for a top-rated university, to go study abroad or simply just study as a domestic higher education institution. Whatever the path you choose, there needs to be clarity for the bank if that institution is worth giving a loan for, what is the employability of the student after that course and other factors that are determined on a case-by-case basis. Banks generally revolve their conditions to the loan around these factors.
The difference between banks and NBFC in this regard is that, where the banks are a little rigid with their loan approval process, an NBFC can be a little more flexible. Both banks and NBFC cover most of the common expenses that one might face during higher studies such as fees, transportation, security deposits, money for books and so on. The key difference here is that banks often place a cap on such funds. NBFCs on the other hand offer a wider range of more flexible services and even provide add-ons for students who want to study abroad.
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